Free Updates

Exclusive content to your inbox for FREE!

To Sell or Not to Sell

by Peter Renton on January 18, 2013

Both Lending Club and Prosper have had a trading platform for several years now. Some investors are very active users and sell notes on a regular basis whereas others never even register for the trading platform.

Selling Notes at Lending Club

At Lending Club investors have the flexibility to sell any note they own, as long as it isn’t in default. At any one time around 15% of the notes on Folio are for loans that are late. Many of these notes are discounted heavily and get picked up by those investors with a high risk tolerance.

That leaves 85% of the notes for sale on Folio that are now current. When I checked today that number was in excess of 44,000. Clearly a lot of people see value in putting their notes up for sale.

Selling Notes at Prosper

Prosper has a less vibrant secondary market because they don’t allow additional states like Lending Club does. They also do not allow lenders to sell late notes, which reduces the popularity of the platform. Sellers have a choice to sell their notes at a fixed price or with an auction model.

As of this writing there were just under 9,000 notes for sale (all of them current) on Prosper which is about 20% the size of number of current notes for sale at Lending Club. But there are plenty of buyers on Prosper as well particularly for notes priced at a discount.

Are you an active or passive investor?

This is the key question. Some investors monitor their accounts daily putting notes up for sale every day and couldn’t imagine doing it any other way. These are active investors.

Then there are the passive investors. They make their investments and then pay little attention to them. They may login to their account regularly to make reinvestments but they are not interested in monitoring their accounts closely.

I fall into the passive investor camp. It may be surprising for someone who spends all day every day learning about and discussing p2p lending but I consider these investments passive. I want my money to grow with as little effort as possible. I like to automate as much of the process as possible so I don’t want to be selling notes on a daily basis on Folio.

Now, let me be clear. I am not saying my way is the best way. It is quite possible to earn a higher return by monitoring your portfolio closely and putting your notes for sale on Folio. But each person has his or her own investment style and the passive approach works for me.

One of these days I would like to do an experiment where I take half of my portfolio and sell every late note and put my current notes up for sale as well. Do this religiously for three months and then see how the returns differ. I suspect that over the long run returns would be better with this active approach. If anyone has conducted an experiment like this please let me know.

So, I am interested to hear from others. Do you consider it crazy not to take advantage of Folio or do you prefer to let your investments take care of themselves? Please share your thoughts in the comments.

I’m a somewhat active investor. Since I’m in a Folio-only state, there wasn’t really a hurdle for me when it came to selling on the secondary market – I can see why it would be less appealing for people to learn a whole other platform just to sell the occasional note.

A lot of the selling I did was after I spent a month or two investing and learned more about it. I’d bought a bunch of notes that I decided I didn’t really want, so I went through a couple of rounds of selling off the less-desirable ones. I also sell anything that goes even slightly late.

Of the fourteen notes I’ve sold at a discount (mostly around 5-10%, and maybe 2-3 of them at 10-20%) two are in grace period, one is charged off, one is 90+ days late, and one is 16-30 days late. I figure I’ve lost about $30 in selling late notes, but I’ve avoided a $20 chargeoff and probably the 90+ day late one will be a $24 chargeoff. Time will tell if I’m doing well for myself or if it’s just about breaking even. I suspect more of the ones I sold will be charged off eventually. It certainly isn’t saving me a ton of money so far, but it also doesn’t take me very long to monitor, and I find I have better peace of mind if I get rid of the late ones.

Sarah, Thanks for chiming in. I like that you are monitoring your progress and should be able to tell over the long run how much more you have made by selling notes. And I think you make a good point about piece of mind. I think that is the reason why a lot of people sell their notes as soon as they go late.

Not to nitpick, but I would argue that the only true “passive” investors are the ones who put their money in some automated account like a “Prime” & leave it alone. The rest of us, which I suspect includes everyone reading this, aren’t truly “passive” investors. Truly passive investors don’t spend the time we do picking notes, testing/refining filters etc etc. Passive investors make one decision, hold it & check their balance every 3-6 months, if that. I doubt that describes anyone here.

Furthermore I’d argue that the use or non use of Folio is only one component of what makes someone a active or passive investor. There are some people who don’t use Folio…………….yet spend much more time than Folio users picking notes. I’ve been a daily Folio seller for over 2 years, yet I rarely spend more than 30-35 minutes per week total managing each of my accounts.

Setting all that aside, I don’t think that people who don’t use Folio are necessarily crazy, as you put it. Nor do I think people who use Folio are necessarily smart or using it beneficially/wisely. For example, those of us who’ve been doing this awhile may be familiar with a blogger who documented his very active, very aggressive Folio use. Buying & selling high yield LC notes & making annualized returns in excess of 25% for months on end…………………….until it all collapsed like a wet taco a year later (as I said it would)

Nevertheless………….I have no doubt whatsoever that the best returns long term are going to be achieved by people who use Folio actively & judicially in combination (of course) with good note picks, among other things . I will say that without Folio, I’d decrease my p2p investments by 90%. Why? Because I’m confident I know what a “passive” long term p2p investment will return………………..& I’m not egotistical enough to believe that I will outperform that number by a large enough margin (to justify the risks) just by consistently picking “better” notes.

Dan, I can see that the terms active and passive are not clear cut. I would say there is a spectrum between completely passive, which as you correctly point out is the Lending Club PRIME or Prosper Premier investor, and completely active – those who spend a lot of time picking notes and then time monitoring and selling them. So, it is true that I am not a completely passive investor but I would say I fall on that end of the spectrum.

Interesting that you would say you would reduce your investment by 90% without the use of Folio. So, do you still feel that the real long term returns for an average p2p investor (who doesn’t use Folio) is going to be in the 5-6% range as you have stated here before? Then how much more do you think an astute note picker (who doesn’t use Folio) could achieve long term? Always interested in your thoughts.

“For example, those of us who’ve been doing this awhile may be familiar with a blogger who documented his very active, very aggressive Folio use. Buying & selling high yield LC notes & making annualized returns in excess of 25% for months on end…………………….until it all collapsed like a wet taco a year later (as I said it would)”

I am not familiar with this blogger. What was the event or action that led to his strategy demise?

Chris…………..Ribbing & joking aside, I’m not interested in criticizing someone who was brave enough to document all his results, strategies etc. for all to see………………..& to admit losses & failures when it would have been so much easier to just stop posting & fade into the background.

Suffice it to say that there were a few errors in the high frequency trading strategy that proved unsustainable. Assumptions on fair value on both the buying & selling side were off & was the estimates of the level of demand at various price points. As I’m sure you realize, on Folio (especially on LC) at the end of the day, it’s pretty much a zero sum game. How good one is in pricing & on ones assumptions as to the behavior of the person on the other side of each “trade” determines how well one does……………..& he just made some that didn’t work out.

He was trying something different (actively trading notes) and sharing his experience on the blog. He started out with returns over 20% and ended with up with about half that number. He ended up needing his money back, so he cashed out his account. His last blog post was quite illuminating for those folio-only investors.

It should also look real familiar to some people doing pretty much the same thing right now ( & talking about it)……………though I’m guessing they’d consider their strategy a 2.0 or 3.0 version that has solved the mysteries of the universe & cannot fail

My views remain pretty much the same, though I’d widen that slightly & suggest a 4-7% long term for the avg. p2p investor not using Folio. If that sounds low to some, I’d suggest that we need to keep in mind that even though we here tend to ignore them, there are a substantial number of p2p investors out there who invest almost exclusively in the AA or A notes. All those people will almost surely get 7% or less, some may even get less than 4% Also, though Premier is too young to really draw any conclusions, if you look at Prime, there is little doubt that they will mostly fall within a 4-7% long term range too…………….as your own Prime account Peter, has clearly demonstrated.

As for the long term returns of an “astute” note picker who doesn’t use Folio? That’s a much tougher question. No, I’m not even going to try defining what an “astute” note picker is. …………….I’m going to suggest a LT return range of 9-13% for the “astute” to “VERY astute” ( for lack of a better term) note picker not using Folio. These are very very good numbers, no doubt.

I can already picture some people rolling their eyes & saying that they can do, or have done substantially better. My response to that is, perhaps, though I doubt it can be maintained LT. Nevertheless, I understand your feelings. There were a couple of regular posters right here who claimed LT returns of 19-20% as little as a year ago. Oddly enough though, they don’t seem to come around much anymore. I’m sure it’s just a coincidence I’d also suggest to some people who are getting highly elevated return numbers after taking something ridiculous like 2 months to buy 200 notes, that they wouldn’t be able to duplicate that performance LT if time constraints were an issue or if they attempted to buy a large number of notes all at once.

So I guess given all of the above info. the natural question is how much can an “astute” to “very astute” note picker using Folio make, correct? Well, I’m not a “very” astute note picker, but I’d like to think that I’m a “very” astute Folio user. Still……………..I don’t use every little single advantage I could use on Folio, I just know that I could if I wanted/needed to. Regardless, I’m very confident in stating that “astute” to “very astute” Folio users (on LC only) have little trouble consistently beating13-14% with a medium risk &/or shorter term portfolio or beating 16-17% on a higher risk &/or longer term portfolio.

Thanks for these thoughts Dan, I agree with most of your assessments here. The only thing I would say is that the average interest rate has been creeping up over the last 12 months which will probably correspond to a higher average return.

Higher average return than the numbers I listed?? Higher For whom ? For the average p2p investor not using Folio? For the astute investor, (as you called them) not using Folio? Please specify………………..Because you cannot mean higher across the board?

I should have made it clear. I think the higher interest rates at Lending Club have made it easier for investors in the higher risk notes to earn a higher return. Whether or not this is sustainable remains to be seen but Lending Club’s reported return numbers have been drifting higher for their D-G grade notes for some time now.

Peter…………Are you confident that the reported Lending Club return numbers on D-G notes have been drifting higher because they’re actually doing better & not because the average age of those loans are getting shorter & shorter due to the massive increase in volume?……………….In other words, they “appear” to be doing better because they’ve had less time to go bad?

Peerlend, are you there? You’ve always been much more eloquent with the whole “speedboating” explanation.

Dan, I don’t want to get into this too much here because this topic is really worth a separate blog post and it is not really related to this post. I make my claim, not from any speedboating idea, but rather my own experience. When I started my Roth IRA I was fully invested in D-G loans with an average interest rate of 18.1%. In 2012 with pretty much the same strategy my average interest rate was 20.3%. The big question is this: are my 2012 loans more risky than my 2011 loans even though they have pretty much the same criteria? If the answer is no then I can expect a higher return on my money. That is why I said time will tell if the higher average interest rate at LC will lead to higher returns.

My strategy is quite simple. It’s aggressive buying and selling.
However, it’s not about peddling risky notes. I’ll take the profits from my Folio sales, reinvest a small portion back into risky notes, and the rest into quality, interest bearing notes like the passive investors. I’m slowly increasing the number of quality notes (all which are currently performing well) I own without taking a dime out of pocket. (It’s almost like getting them free). I’ve also been able to increase the number of risk-notes than when I started, and I haven’t put an extra cent into my account since the day I opened it.

I think passive investors can certainly increase their rate-of-return by taking a little bit more risk. Even if you currently have $25,000 wrapped up in quality notes, you can still explore “The Dark Side” with as little as $100 or even $50. My average cost for a high-risk note (for this month) is $7.11. So by moving $100 into risk, you can play with 14 notes. Even if you get stuck with some losses, charge-offs or BKS, it’s still quite possible to NET 10% or more on that $100 investment.

Very interesting strategy. I am seeing more and more people trying these high risk strategies by purchasing late notes at a deep discount. I would really like to see how that works out over the long term. Keep us posted.